Jack Townsend offers this blog on Federal Tax Crimes principally for tax professionals and tax students. It is not directed to lay readers -- such as persons who are potentially subject to U.S. civil and criminal tax or related consequences. LAY READERS SHOULD READ THE PAGE IN THE RIGHT HAND COLUMN TITLE "INTENDED AUDIENCE FOR BLOG; CAUTIONARY NOTE TO LAY READERS." Thank you.

Sunday, September 30, 2012

This is installment #3 of the discussion of United States v. Vallone, et al., 698 F.3d 416 (7th Cir. 2012), here. Vallone affirmed the convictions of the promoters of a widely marketed fraudulent trust scheme.

As is typical in tax crimes cases, a key defense in Vallone is that the defendants did not subjectively know that they were violating a legal duty and therefore did not meet the element of willfulness as defined in a series of Supreme Court cases culminating in Cheek v. United States, 498 U.S. 192 (1991). Ultimately, a finding of willfulness absent a confession from a defendant requires that the jury infer beyond a reasonable doubt from the facts and ambiance of the proof at trial that the defendant had the requisite intent to commit the crime. In may tax crimes cases, willfulness is the only seriously disputed element of the crime. For example, tax evasion (Section 7201) has three elements -- willfulness, a tax due and owing and an affirmative act in furtherance of the evasion. Often, the Government can prove the latter two, so although all elements are submitted to the jury, the real dispute is over willfulness. The same is true or the other tax crimes which all require willfulness or something equivalent to willfulness.

In Vallone, the trial judge held that the defendants could not put on evidence that the schemes were legal. That issue had been litigated several times in the Seventh Circuit and other courts and, besides, the trial judge determines the law. The trial judge said in precluding that type of evidence:

You cannot argue to the jury that Aegis was a lawful plan and therefore because it was or is lawful that somehow the defendants are not guilty in this case. You certainly can require the government to prove that each defendant may be convicted of tax offenses only if he knows that the code requires him to pay. That's the government's burden here, they must show that the actions were willful, that they were done with knowledge, and the government concedes that. But you will not be permitted to reargue the lawfulness of the Aegis plan itself.

The defendants claimed that this decision of the trial judge precluding evidence that the schemes were legal undermined their Cheek defense. The Court of Appeals rejected the argument:

The district court was correct in holding that the legality of the Aegis trust system was not a matter for the jury to resolve. This was, instead, a question of law for the court to resolve, e.g., United States v. Caputo, 517 F.3d 935, 942 (7th Cir. 2008) ("The only legal expert in a federal courtroom is the judge."), and one which this court, indeed, had already resolved, see Muhich, 238 F.3d at 864; Bartoli, 2000 WL 687155, at *1. It was therefore appropriate to preclude the defendants from attempting to show that the Aegis trust system was legal. See United States v. Cheek, 3 F.3d 1057, 1063 (7th Cir. 1993) (sustaining instructions advising jury that certain of defendant's beliefs as to the tax laws were erroneous) (citing United States v. Powell, 955 F.2d 1206, 1213 (9th Cir. 1992) (because jury cannot decide legality of particular conduct under tax code, district court must instruct jury that conduct was unlawful)). The district court's order in no way blocked an appropriate Cheek defense, however. The court explicitly recognized that it was the government's burden to prove that the defendants knew what their obligations were under the law. And nothing the court said suggested that it would preclude the defendants from attempting to show why they in good faith believed that the Aegis trust system was a lawful means of tax avoidance under the relevant statutes, regulations, and case law.

The Court then had this interesting discussion:

The defendants posit, and we may assume arguendo, that expert testimony would be one way in which a defendant charged with tax evasion can establish that he had a good faith, albeit mistaken, belief that his conduct was lawful. Our own decision in United States v. Harris, 942 F.2d 1125, 1132 n.6 (7th Cir. 1991), explicitly recognizes this possibility. fn3 * * * *fn3Harris notes that among the evidence a defendant may present in support of a defense that he "subjectively, but wrongly" believed his conduct was consistent with the Internal Revenue Code and the cases interpreting it is expert testimony as to the case law on which the defendant purports to have actually relied. 942 F.2d at 1132 n.6. See United States v. Garber, 607 F.2d 92, 95-99 (5th Cir. 1979) (en banc) (in tax evasion case, district court erred, inter alia, by excluding expert testimony proffered by defense on novel question of whether certain payments defendant received in exchange for her rare blood plasma constituted taxable income: "In a case such as this where the element of willfulness is critical to the defense, the defendant is entitled to wide latitude in the introduction of evidence tending to show lack of intent. The defendant testified that she subjectively thought that proceeds from the sale of part of her body were not taxable. By disallowing [the expert's] testimony that a recognized theory of tax law supports Garber's feelings, the court deprived the defendant of evidence showing her state of mind to be reasonable."), cited with approval in United States v. Clardy, 612 F.2d 1139, 1153 (9th Cir. 1980) (district court did not err in permitting IRS agent to give expert testimony that particular deduction was not proper: "we believe that this type of testimony is relevant to the issue of willfulness where the theory of the defense is that there is a good faith dispute as to the interpretation of the tax laws"); but see also United States v. Klaphake, 64 F.3d 435, 438-39 (8th Cir. 1995) (where defendant's attorney was permitted to testify he was retained to prepare prototype trust document and as to legitimate purposes and advantages of business trust, and where attorney's opinion letter to defendant was also admitted into evidence, court properly excluded attorney from testifying on legality of trust arrangement; latter point presented question of law for court, and given the evidence that was admitted, defendant's defense that he reasonably relied on advice of counsel was not eviscerated); United States v. West, 22 F.3d 586, 597-600 (5th Cir. 1994) (in bankruptcy fraud case, where defendant's bankruptcy experts were permitted to testify that they advised defendant to structure relevant transactions as he did and that the transactions were lawful, district court did not abuse its discretion in refusing to let experts explain the legal basis for their advice); United States v. Bryan, 896 F.2d 68, 72-73 (5th Cir. 1990) (although expert testimony might be relevant to willfulness in certain cases, it was properly excluded where tax shelters devised by defendants were clearly shams lacking any valid business purpose); United States v. Curtis, 782 F.2d 593, 599 (6th Cir. 1986) (rejecting Garber and sustaining exclusion of defendant's proffered expert testimony regarding uncertainty in particular area of tax law, reasoning in part that absent connection between uncertain state of law and defendant's state of mind, expert's testimony regarding uncertainty in law is irrelevant); United States v. Ingredient Tech. Corp., 698 F.2d 88, 96-97 (2d Cir. 1983) (declining to follow Garber and sustaining exclusion of expert testimony as to Department of Treasury regulations that defendant offered to show defendant could not have formed willful intent to evade taxes); United States v. Herzog, 632 F.2d 469, 473 (5th Cir. 1980) (expert's view on complexity of tax laws sheds no light on defendant's intent).

Finally, to the extent the defendants are suggesting that the government's motion and the district court's ruling somehow prevented them from showing that the relevant provisions of the law were ambiguous, see Defendants' Joint Brief at 45-46, they are blurring the distinctions between objective ambiguity in the law and their own purportedly good-faith misinterpretation of the law. As our decision in Harris makes clear, objective ambiguity is a question for the court; and if the court were to find the law objectively ambiguous, that finding would require dismissal of the indictment, as the defendants would not have had appropriate notice that their conduct was illegal. 942 F.2d at 1132 n.6. Defendants make no argument that the provisions of the Internal Revenue Code and regulations governing trusts are objectively ambiguous.

I won't pick apart the elements of this quote. In broad strokes, I think the Seventh Circuit is saying that expert testimony would be permissible -- not to prove the legality of the schemes, but to show the defendants' state of mind as to the knowledge of the legal duty by inferences that might be drawn as to uncertainty in the law at the critical time. I think the Seventh Circuit is right to so hold, but I think that other courts might not agree. For readers wanting to read more on this issue, I cut and paste the discussion from my Federal Tax Crimes book (footnotes omitted and I do not indent the whole portion cut and paste in order to show the internal indented quotes):

(7)Complexity and Uncertainty in the Law

Since criminal conduct requires the intentional violation of a known legal duty, one cannot be guilty of a crime if the legal duty is not certain. One defense to a tax crime is that the duty upon which the criminal charge is based is not sufficiently certain to put the defendant on notice that failure to honor the uncertain duty could subject him or her to criminal charges.

The Supreme Court addressed this concept in James v. United States, 366 U.S. 213 (1961). The issue was whether James could be prosecuted under § 7201 for failing to report and pay tax on embezzled income. James had in fact been convicted, meaning that the jury had determined that he had intentionally violated a legal duty known to him. The question was whether, because of legal uncertainty as to the duty, he could be convicted even if he had a subjective intent to violate a duty that he “knew.” In order to resolve that issue the Court had to determine whether embezzled funds were income taxable under the Code and, if so, whether James could be prosecuted for failure to report the embezzled proceeds. This sets up the issue quite nicely, for the fact that the Court had to resolve the substantive issue -- i.e., whether embezzled funds were taxable -- meant that the issue was not without doubt. Indeed, the reason that it was in doubt was because the Supreme Court, in an earlier case (Commissioner v. Wilcox, 327 U.S. 404 (1946)), had held that embezzled funds were not income for federal tax purposes. Between the Court’s decisions in Wilcox and James), the Supreme Court decided in Rutkin v. United States, 343 U.S. 130 (1952) that extorted funds were income. Although the Court in Rutkin had expressly declined to overrule Wilcox, the Court’s analysis in Rutkin undercut the rational for Wilcox. Indeed, in James, the Court said that “examination of the reasoning used in Rutkin leads us inescapably to the conclusion that Wilcox was thoroughly devitalized.” Yet, Wilcox stood unreversed, so the issue was whether James could be criminally prosecuted for failure to report embezzlement proceeds that the unreversed Supreme Court authority squarely on point held was not income.

The Supreme Court started its analysis in James by taking the step it had declined to take in Rutkin – holding that embezzled funds are income, thus overruling Wilcox. The dissenting opinions take the court to task on that issue, but I do not want you to be concerned about the pro's and con's in the debate over whether embezzled funds are or should be taxable income under the Code. What I want you to understand is that, at the time of the taxpayer's embezzlement in question James could not have “known” that he had a legal duty to report the embezzled funds as income, for Wilcox had not been overruled even though an intervening Supreme Court case had undercut its theoretical foundations. James may have thought – indeed, in the case, James actually did think (so the jury found) – he had such a duty and intended to violate the legal duty that he thought existed. The problem moving the Supreme Court to reverse was that the that duty itself was unknowable in any objective legal sense because of the state of the Supreme Court authority. After holding that embezzled funds were, after all, income (thus overruling its prior decision), the Court in James addressed the question of whether James could be prosecuted for willfully failing to report that income while Wilcox's holding was still unreversed precedent. The Court said:

But, we are dealing here with a felony conviction under statutes which apply to any person who “willfully” fails to account for his tax or who “willfully” attempts to evade his obligation. In Spies v. United States, 317 U.S. 492, 499, the Court said that § 145(b) of the 1939 Code embodied “the gravest of offenses against the revenues,” and stated that willfulness must therefore include an evil motive and want of justification in view of all the circumstances. Id., at 498. Willfulness “involves a specific intent which must be proven by independent evidence and which cannot be inferred from the mere understatement of income.” Holland v. United States, 348 U.S. 121, 139.

We believe that the element of willfulness could not be proven in a criminal prosecution for failing to include embezzled funds in gross income in the year of misappropriation so long as the statute contained the gloss placed upon it by Wilcox at the time the alleged crime was committed. Therefore, we feel that petitioner's conviction may not stand and that the indictment against him must be dismissed.

The bottom line holding is that, given the confusion as to the objective legal duty, James could not be prosecuted. It did not matter that the jury had determined that James had willfully failed to report the income, a holding which logically meant that James had not placed any reliance on Wilcox and, moreover, had knowingly and intentionally failed to meet the duty implicitly created by Rutkin. It did not matter if James had the darkest of motives vis-a-vis the federal tax system. All that mattered was that, as a matter of law regardless of the facts, the legal duty was uncertain and thus could not support a criminal prosecution.

James thus stands squarely for the proposition that a defendant cannot be prosecuted for a crime of willfulness (at least willfulness in the criminal tax laws) regardless of his actual motive to violate a legal duty that he thought he had when, objectively and as a matter of law, the legal duty was not certain. One line of defense to tax crimes spawned by this holding in James is that the underlying legal duty is sufficiently uncertain in the James sense. There are key cases that illustrate this defense.

However, before turning to the key cases, I want to deal with the conceptual issues inherent in James that may be easily and erroneously conflated. James itself held that uncertainty in the law can preclude prosecution regardless of a defendant’s intention to violate what he or she may think is a known legal duty. In this inquiry, the defendant’s actual intent is irrelevant, and conceptually therefore it is not a jury issue but a judge issue that the judge pre-empts without the existence of actual intent being relevant. This issue turns upon the legal conclusion as to whether the law is “knowable” – meaning that it sets a discernible legal duty. Knowability is a legal issue for the court, as the Supreme Court held in James. The issue for the jury is whether the defendant has willfully violated that knowable legal duty. That is a factual issue for the jury that is only addressed after the court first determines that the legal duty is knowable. (Actually, as in James, that determination can be made after the defendant has been found guilty by reversing the conviction.) This may sound like semantics, but the difference is, I think, critical. For example, a defendant should be able to argue that the law is not knowable in a James sense and thus foreclose prosecution altogether. In this argument, the defendant should marshal all of the legal ambiance that would suggest that that the law does not meet the standard of knowability for criminal prosecution requiring willfulness. If that legal argument fails, the factual issue for the jury becomes whether the defendant violated a legal duty known to him. At least arguably, the defendant should be able to introduce evidence as to uncertainty in the law in order to prove by inference that he or should did not have the required intent to violate a known legal duty. (The interplay among the competing opinions in James seems to make it clear that this was a good factual defense if James had been aware of the legal uncertainty; I recommend re-reading the James opinions – all of them – and the text and footnote discussion of James above.)

One of the most controversial cases is United States v. Garber. In Garber, the taxpayer had a rare form of blood, the periodic sale of the plasma from which drew high compensation. The taxpayer did not report the income. The Government charged her under § 7201 with evading income taxes. The taxpayer urged, consistent with James, that uncertainty as to taxability of blood prevented her prosecution for tax evasion. The plurality opinion in that case agreed as follows:

A tax return is not criminally fraudulent simply because it is erroneous. Willfulness is an essential element of the crime charged. As such, the government must prove beyond a reasonable doubt that the defendant willfully and intentionally attempted to evade and defeat income taxes for each year in question by filing with the IRS tax returns which she knew were false. [Citing Pomponio and Bishop] It is not enough to show merely that a lesser tax was paid than was due. Nor is a negligent, careless, or unintentional understatement of income sufficient. [Citing Holland and Murdock] The government must demonstrate that the defendant willfully concealed and omitted from her return income which she knew was taxable.

When the taxability of unreported income is problematical as a matter of law, the unresolved nature of the law is relevant to show that defendant may not have been aware of a tax liability or may have simply made an error in judgment. Furthermore, the relevance of a dispute in the law does not depend on whether the defendant actually knew of the conflict. In United States v. Critzer, 498 F.2d 1160 (4th Cir. 1974), the Fourth Circuit reversed a criminal tax fraud conviction against an Eastern Cherokee Indian who failed to report a portion of her income derived from land held by the United States in trust for the Eastern Cherokee Band. The evidence clearly established that the underreporting was intentional. Whether the income was taxable, however, was a disputed question dependent on the interpretation of certain land allotment statutes, which the court did not resolve. Instead, it reversed the conviction because of the absence of authority definitively governing the situation. The court's language is particularly apt here:

As a matter of law, defendant cannot be guilty of willfully evading and defeating income taxes on income, the taxability of which is so uncertain that even co-ordinate branches of the United States Government plausibly reach directly opposing conclusions. As a matter of law, the requisite intent to evade and defeat income taxes is missing. The obligation to pay is so problematical that defendant's actual intent is irrelevant. Even if she had consulted the law and sought to guide herself accordingly, she could have had no certainty as to what the law required.

Critzer differs from this case in that the defendant there had been advised by the Bureau of Indian Affairs that the income received from the transactions on the Reservation was exempt from taxation. The fact that Garber did not have the benefit of such official advice does not persuade us that the result here should be different. The Critzer court did not so limit its holding:

It is settled that when the law is vague or highly debatable, a defendant actually or imputedly lacks the requisite intent to violate it.

To hold otherwise would advocate convicting an unsophisticated taxpayer who failed to seek expert advice as to whether certain income was taxable while setting free a wise taxpayer who could find advice that taxes were not due on the identical type of debatably taxable income.

That Critzer was not decided on the basis of the defendant's actual intent is further evidenced by the reasoning of the court and its reliance on James v. United States, 366 U.S. 213(1961). In James, the Supreme Court put to rest a dispute over the taxability of embezzled funds. Fifteen years before James, the Court had held such funds non-taxable. CIR v. Wilcox, 327 U.S. 404 (1946). Subsequently a realigned Court undermined the viability of Wilcox by deciding that extortion money was taxable, distinguishing Wilcox on tenuous grounds. Rutkin v. United States, 343 U.S. 130 (1952). When the taxability of embezzled funds again reached the Court in James, it decided that Rutkin had in effect overruled Wilcox and that embezzled monies were taxable. Nevertheless, the court reversed James' conviction for willfully failing to report embezzled funds in violation of section 7201 because of the uncertainty of the law created by Wilcox. Significantly, neither James nor the cases following James required actual reliance on Wilcox to negate willful intent. As noted in Critzer:

the uncertainty created by Wilcox as a matter of law precluded a demonstration of “willfulness,” without regard to the defendant's actual state of mind with respect to his knowledge or reliance on Wilcox.

498 F.2d at 1163.

Both Critzer and James involved disagreements among recognized authorities which were more clearly documented than the theories presented here. James involved conflicting Supreme Court decisions, and in Critzer the Bureau of Indian Affairs and the Internal Revenue Service strongly disagreed on the taxability of the income. In the case presently before us, as conceded by all the experts who testified, there is a dearth of authority directly supporting either argument. However, the fact that the question has never before evoked anything more than theories on either side adds to rather than detracts from the critical conflict upon which defendant’s criminal liability hinges. Neither position is frivolous, and the fact that both are urged without clear precedential support in law demonstrates that the court should not have restricted the evidence or instructed as it did.

The tax treatment of earnings from the sale of blood plasma or other parts of the human body is an uncharted area in tax law. The parties in this case presented divergent opinions as to the ultimate taxability by analogy to two legitimate theories in tax law. The trial court should not have withheld this fact, and its powerful impact on the issue of Garber's willfulness, from the jury. In a case such as this where the element of willfulness is critical to the defense, the defendant is entitled to wide latitude in the introduction of evidence tending to show lack of intent.

The Ninth Circuit recently summarized this defense as follows:

The element of willfulness cannot obtain in a criminal tax evasion case unless “the law clearly prohibited the conduct alleged in the indictment.” Schulman, 817 F.2d at 1359; see also James v. United States, 366 U.S. 213, 221-22 (1961) (vacating taxpayer's conviction for failure to report embezzled funds as income because conflicting caselaw rendered the predicate tax statute ambiguous when applied to embezzled funds). Without sufficient clarity in the law, taxpayers lack the “fair notice” demanded by due process so that they may conform their conduct to the law. United States v. Dahlstrom, 713 F.2d 1423, 1427 (9th Cir. 1983) (citing United States v. Batchelder, 442 U.S. 114, 123 (1979)). However, a lack of prior appellate rulings on the topic does not render the law vague, nor does a lack of previously litigated fact patterns deprive taxpayers of fair notice. See Russell, 804 F.2d at 575 (citing United States v. Ingredient Tech. Corp., 698 F.2d 88, 96 (2d Cir. 1983) (stating that it was “immaterial” that there was no prior litigation directly on point)). Thus, criminal prosecution is permissible when it is “clear beyond any doubt that [the conduct] is illegal under established principles of tax law . . . .” Russell, 804 F.2d at 575.

Concerned about the line of cases exemplified by Garber, the Government attempts to limit the damage through the following analysis.

Care should be taken to distinguish the average criminal tax case from a case such as Garber, which was based on “unique, indeed near bizarre, facts.” United States v. Burton, 737 F.2d 439, 444 (5th Cir. 1984); see also United States v. Daly, 756 F.2d 1076, 1083-84 (5th Cir. 1985). In Burton, the Fifth Circuit explained and limited its opinion in Garber. The court stated that “apart from those few cases where the legal duty pointed to is so uncertain as to approach the level of vagueness, the abstract question of legal uncertainty of which a defendant was unaware is of marginal relevance,” explaining that “[e]vidence of legal uncertainty, except as it relates to defendant’s effort to show the source of his state of mind, need not be received, at least where . . . the claimed uncertainty does not approach vagueness and is neither widely recognized nor related to a novel or unusual application of the law.” Burton, 737 F.2d at 444. And, in United States v. Curtis, 782 F.2d 593, 598-600 (6th Cir. 1986), the Sixth Circuit rejected Garber on the following grounds: (1) Garber allows juries to find that uncertainty in the law negates willfulness even if the defendant was unaware of the uncertainty; (2) it distorts the expert’s role and intrudes upon the judge’s duty to inform the jury about the law; and, (3) it requires the jury to assume the judge’s “responsibility to rule on questions of law.”

In those few courts that have recognized uncertainty in the law as a potential defense, the court looks to see whether the law clearly prohibited the defendant’s alleged conduct. See United States v. Solomon, 825 F.2d 1292, 1297 (9th Cir. 1987) (explaining that application of decision in United States v. Dahlstrom, 713 F.2d 1423, 1428 (9th Cir. 1983), is limited to mere advocacy of tax shelter program). In Dahlstrom, the court reversed the convictions of the defendants, who had advocated the creation of tax shelters to investors, because the legality of the shelters was “completely unsettled.” Dahlstrom, 713 F.2d at 1423, 1425, 1428. Taxpayers have fair notice of a scheme’s illegality if it is clear that it is illegal under established principles of tax law, regardless of whether an appellate court has so ruled. See United States v. Krall, 835 F.2d 711, 714 (8th Cir. 1987). Compare United States v. Mallas, 762 F.2d 361, 361-365 (4th Cir. 1985) (coal mining tax shelter providing deductions of advance minimum royalty payments raised novel questions of tax law so vague that defendant lacked requisite specific intent) with Krall, 835 F.2d at 711, 713, 714 (“[a]lthough precise ‘foreign trust’ arrangement used by Krall had not yet been declared illegal, there is no doubt the scheme violated well-established principles of tax law”; thus defendant could not claim that his conviction violated due process); United States v. Tranakos, 911 F.2d 1422, 1431 (10th Cir. 1990) (illegality of sham transactions to avoid tax liabilities is well-settled); United States v. Schulman, 817 F.2d 1355, 1359-60 (9th Cir. 1987) (tax shelters based on sham transactions clearly illegal); and United States v. Crooks, 804 F.2d 1441, 1449 (9th Cir. 1986) (“The doctrine of substance versus form is well ensconced in tax law.”)

To minimize problems presented by trying to establish willfulness at trial, items turning on reasonably debatable interpretations of the Tax Code and questionable items of income should be eliminated from the case; and, whenever possible, complicated facts should be simplified. This is advantageous for purposes of presentation of the case to the jury: it strengthens the government’s argument that there is no doubt that the defendant committed criminal acts to evade taxes, because the taxability and tax consequences were known to the taxpayer.

Given the fact that the uncertainty of law defense is firmly grounded on the Supreme Court’s James decision, is the Government right in suggesting that only a “few courts” recognize the defense? James requires that all courts recognize the defense.

UNITED STATES v. HARRIS942 F.2d 1125 (7th Cir. 1991)

David Kritzik, now deceased, was a wealthy widower partial to the company of young women. Two of these women were Leigh Ann Conley and Lynnette Harris, twin sisters. Directly or indirectly, Kritzik gave Conley and Harris each more than half a million dollars over the course of several years. For our purposes, either Kritzik had to pay gift tax on this money or Harris and Conley had to pay income tax. The United States alleges that, beyond reasonable doubt, the obligation was Harris and Conley's. In separate criminal trials, Harris and Conley were convicted of willfully evading their income tax obligations regarding the money, and they now appeal.

Under Commissioner v. Duberstein, 363 U.S. 278, 285 (1960), the donor's intent is the “critical consideration” in distinguishing between gifts and income. We reverse Conley's conviction and remand with instructions to dismiss the indictment against her because the government failed to present sufficient evidence of Kritzik's intent regarding the money he gave her. We also reverse Harris' conviction. The district court excluded as hearsay letters in which Kritzik wrote that he loved Harris and enjoyed giving things to her. These letters were central to Harris' defense that she believed in good faith that the money she received was a nontaxable gift, and they were not hearsay for this purpose.

We do not remand Harris' case for retrial, however, because Harris had no fair warning that her conduct might subject her to criminal tax liability. Neither the tax code, the Treasury Regulations, or Supreme Court or appellate cases provide a clear answer to whether Harris owed any taxes or not. The closest authority lies in a series of Tax Court decisions – but these cases favor Harris' position that the money she received was not income to her. Under this state of the law, Harris could not have formed a “willful” intent to violate the statutes at issue. For this reason, we remand with instructions that the indictment against Harris be dismissed. The same conclusion applies to Conley, and provides an alternative basis for reversing her conviction and remanding with instructions to dismiss the indictment.

Harris thus addresses the knowability prong of the uncertainty of law defense. But there is still the fallback that, as a matter of fact, the uncertainty in the law can be supportive evidence that the defendant did not have the actual intent to violate a duty known to him. The mantra I have posited thus is conviction requires both a knowable and known legal duty.

Now, focusing on the evidentiary use of uncertainty of law on the issue of whether the defendant knew the knowable legal duty, courts appear concerned about the potential quagmire of tax law discussions before lay juries who may, in the courts’ imaginations, be more confused than enlightened on the ultimate inquiry of the defendant’s willfulness. Certainly, even as to civil penalty issues (where factual good faith is a specific defense) in trials to the court, courts are reluctant to permit the opinions of expert as to the uncertain state of the law. Expert opinions, they reason, are unhelpful if the purpose is to inform the court as to what the law is and making interpretive choices as to what the law is. Interpreting the law is the function of the court, not an expert; courts are advised as to their interpretive choices by arguments in briefs, not in expert reports or expert testimony. But, where the expert testimony may be relevant to showing not just what the law is but the legal environment in which a party acted in order to assess his or her level of intentionality or willfulness, then uncertainty of the law should be provable in the trial in chief if the defendant posits this defense. In criminal tax cases, good faith does negate willfulness and making legal judgments, even bad legal judgments, in an environment of uncertainty may negate willfulness. Indeed, the discussion among the Justices in James assumes that the defendant could not be found willful factually if he or she were aware of the legal uncertainty and relied upon it (in which case there was no known legal duty); the only way the jury can be apprised of that defense is through documents and witnesses, and the most cogent witness for a tax professional is a qualified expert testifying that the fully qualified and ethical practitioners operate sometimes (indeed usually) in some context of uncertainty and the specific context before the court was, at the time of the conduct in question, an area of uncertainty to qualified and ethical practitioners. The jury could find such testimony helpful in assessing whether or not the defendant had acted willfully. (I caution the reader that I don’t think many courts would accept expert testimony as to the state of the law at the time of the conduct in order to show that the defendant did or did not have the requisite intent to violate a known legal duty.)

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